Earnings in focus as Fed shifts to rear view

Stocks may respond more to earnings news than the Fed Wednesday, now that Fed Chair Janet Yellen's first day of testimony is out of the way.

Intel could be one of a number of positive influences on tech stocks Wednesday morning. Intel soared more than 4.5 percent late Tuesday after it reported higher earnings and revenue, provided a stronger revenue forecast and boosted its buyback.

Apple and IBM were also higher in late day trading after the two announced a partnership aimed at mobile for enterprise customers. Yahoo, however, was out of step with the other big tech names, falling more than 2 percent after an earnings miss and weaker sales guidance.

CNBC holds its fourth annual Delivering Alpha conference in New York all day Wednesday. The conference features legendary investors such as Leon Cooperman, Stan Drunkenmiller and John Paulson. Co-sponsored by Institutional Investor and CNBC, Delivering Alpha has been known to provide more than a few winning investment ideas by panelists.

Yellen appears before the House Financial Services committee at 10 a.m. The Fed chair said nothing surprising in her testimony before the Senate Banking committee Tuesday, but she did surprise stock traders in another way.

The Fed's Monetary Policy report, accompanying her testimony Tuesday, noted the Fed believes small-cap, social media and biotech stocks are overvalued. That snuffed an early market rally and helped send the Russell 2000 down 1 percent and the Nasdaq down a half percent. The Dow was the only index to close higher on the day, up 5 points at 17,060.

"It's very unusual for the Fed chairman to pan any part of the market," said Milton Ezrati, economist and strategist at Lord Abbett. Yellen didn't specify the stock sectors in her testimony though she did say the Fed is watching the leveraged loan market for bubbles.

Ezrati said the comments in the report on small caps were definitely blessed by Yellen as head of the Fed. "She was very selective, and it's noteworthy that she didn't say the whole market. We watched (those stocks) on a roller coast for some months now so it's hardly a surprise, but it's very unusual. She did not use it as a way to say this is why we're tapering—that we're afraid of bubbles," he said.

Fed officials, in speeches this year, have mentioned tech and biotech stocks as an area of overvaluation, but the appearance in the policy report drove it home to traders. The Fed took aim at a section of the stock market that has been a hot one for speculators though some names have pulled back, and some stock analysts have been expecting a further pullback in the Russell 2000.

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Critics of the Fed's easy policies say there are concerns about the impact of super low rates on financial stability, with the creation of bubbles. Some analysts said the Fed's inclusion of comments on various asset classes in its policy report was its way of trying to calm down overheated parts of the markets.

"In last week's speech on the topic of financial stability, Vice Chair Fischer defined the phrase "macroprudential policy" to mean "use of regulatory and supervisory non-central bank interest rate tools to affect asset prices," noted JP Morgan chief U.S. economist Michael Feroli. "We don't think that was meant to include staff reports to talk down asset prices, but that may have been the unintended effect today."

Besides Yellen's testimony, markets will focus on a number of economic reports Wednesday, including PPI at 8:30 a.m. ET, TIC data from the Treasury at 9 a.m.; industrial production at 9:15; the National Association of Home Builders survey at 10 a.m. and the Fed beige book at 2 p.m.

Ezrati said he's watching PPI, expected to rise by 0.3 percent according to Dow Jones. The Fed's favorite metric for inflation, the PCE, personal consumption expenditure index is running at a lower level than CPI, at a 2.1 percent annual pace last month.

"People are worried about inflation because the numbers are up. We've seen commodities prices come down so that should make people feel better," he said. Global oil prices for instance are down about 10 percent from June's highs, and West Texas Intermediate closed Tuesday below $100 per barrel for the first time since May 12.

Ezrati said the fear is not about inflation but the fact that a persistently higher level could cause the Fed to react with rate hikes. It certainly has been a concern in markets though any signs of inflation are so far tame. Investment managers surveyed by Northern Trust, in a second-quarter survey, say they are more positive on U.S. growth prospects, but 51 percent, up from 33 percent last quarter, expect inflation to rise over the next six months.

Deutsche Bank U.S. economist Joseph LaVorgna said PPI would be inconclusive since it's a broad measure. Instead, he is waiting for CPI next week. "Right now, we're just waiting for the next set of data that could change the Fed's thinking and we're just not there yet," he said.

LaVorgna said the Fed may not make much news ahead of its Aug. 22 symposium in Jackson Hole. The Fed said it would stop buying back bonds under its quantitative easing program in October, and the markets have been rife with speculation on when it might move to raise rates.

"You'll have a lot more data between now and then because Jackson Hole in the past has been a blueprint for Fed action," said LaVorgna.